While the rupee slipped to a five-week low in intra-day trades on Thursday after Standard and Poor’s observation it was possible India’s rating could be lowered to speculative grade after general elections if the government in office did not appear capable of reversing growth, the currency regained value later in the day. Although S&P reaffirmed its negative outlook on India’s BBB- sovereign rating, the spectre of a possible future downgrade hurt sentiment and the recovery in the rupee was attributed to reported intervention by the Reserve Bank of India (RBI). The fact that at least a third of estimated monthly purchases of $8 billion, by oil marketing companies, was back in the market was confirmed by the government.

The currency markets also appear to have taken heart from the $15.2 billion attracted through the FCNR(B) and Tier I capital schemes, which experts say would have a salutary effect on the markets given it buffers the RBI’s reserves. Economic affairs secretary Arvind Mayaram told newspersons that approximately “30-40% of oil dollar demand has returned to the markets” adding additional demand would be balanced by dollar inflows. “Strong dollar inflows through the FCNR window and the Tier 1 capital route and export realisations will help strengthen the rupee,” Mayaram observed. With this, the process of normalising the foreign exchange markets has begun.

The currency slipped to levels of 62.76 intra-day, a five-week low but closed at 62.41/$, unchanged over Wednesday’s close when it lost 1.2%, with OMCs starting to pick up a part of their dollar requirements from the market. The rupee has weakened 1.47% over the last five days, primarily due to the strengthening of the dollar, much in line with other emerging market currencies like the Indonesian rupiah, the Turkish lira and the South African rand which have also lost 1-2%.

Hitendra Dave, MD and head of global markets at HSBC, pointed out that the central bank had reiterated oil demand would be brought back into the market in a calibrated manner. “A knee-jerk reaction on the currency may not be warranted,” Dave observed. NS Venkatesh, treasurer at IDBI Bank believes the rupee should settle in a range of 61-62.50/$ as oil demand will be balanced by strong FII flows into the equity markets and a pick-up in exports.

Indranil Sen Gupta, India economist, Bank of America-Merrill Lynch said in a recent report that it was imperative to arrest the falling import cover which has halved to seven months in the past five years, well below the 8-10 months critical for rupee stability. In late August, the RBI had opened a special swap window to supply dollars directly to OMCs after the rupee fell to an all- time low of 68.8250/$. Since then, the currency has recovered 9.3%.

Meanwhile, although it raised concerns about additional fiscal expenditure in the form of increased food subsidies under the Food Security Bill, S&P said India’s external position is an element of strength for the rating, albeit some fragilities. “As of the end of March 2013, India’s foreign currency reserves covered about six months of current account payments. External debt net of liquid assets equaled only 9% of current account receipts (CAR), and the broader measure of net external liabilities to CAR was a bit higher at 53%. These indicators suggest that India does not face the same degree of risks in maintaining the confidence of external creditors as that faced by some other countries at a similar stage of development with more open financial accounts,” the agency noted.

India imported $156.97 billion worth crude oil and products in 2012-13 but the net import bill stood at $98.14 billion after accounting for product exports. Economists apprehended that providing dollars directly to OMCs will eat into India’s forex reserves which stood at $285 billion as on October 25, according to data released by the RBI. While some of the pressure on reserves has eased due to inflows of more than $15 billion via two special swap windows opened by the RBI in early October, these facilities are due to close on November 30. Under these facilities, the RBI had allowed banks to raise Foreign Currency Non Resident Deposits (FCNR) and tier 1 capital and swap it at the RBI at concessional swap rates.“The addition to reserves will provide comfort to the Rupee as it allows RBI greater room to intervene if needed,” said Venkatesh of IDBI Bank.Forex Reserves which had slipped to $274 billion as on September 6, have risen by roughly $ 8 billion since then, which may be partly attributable to valuation effects.